IND AS 116: A paradigm shift or mere adjustment?

This study examines the market reaction to the announcement of an accounting reform that replaces the twin-lease accounting model with a single-lease standard in India. Using an event study methodology, we explore the impact of introducing IND AS 116, which mandates firms to recognize operating leases as Right-of-Use (RoU) assets, thereby, increasing reported liabilities and altering key financial ratios. Our findings reveal a significant negative market reaction, indicating investors’ concern over increased leverage and perceived financial risk. Further analysis documents that firms with stronger negative reactions ultimately did not report RoU assets post-implementation of the reform, showing their likelihood of shifting to short-term leases to mitigate balance sheet impact. Additionally, firms affiliated with business groups exhibit higher resilience to such announcements. For firms with institutional holdings, the evidence is mixed. Our findings have important implications for policymakers, investors, and managers navigating regulatory changes in financial reporting.